EU faces tough post-Brexit test with 2021-2027 budget

Commission President Ursula von der Leyen, Nicos Anastasiades, president of Cyprus; Slovenian PM Marjan Šarec, Council President Charles Michel, Portuguese PM Antonio Costa, and Mario Centeno, Eurogroup president, at European Council on 13 December 2019. [European Council]

Unlike national governments who adopt budgets every year, EU finances cover a seven-year period and need to be agreed by all 27 member states. The bloc’s next budget, the first after Brexit, will be debated by EU leaders on Thursday (20 February). EURACTIV brings you an overview.

The talks will pit countries seeking more funding to sustain traditional policies against the “frugal four” who want to refocus EU spending and finance new priorities like migration, security, innovation or climate change.

A quick, consensual agreement on the 2021-27 financial framework, as for previous spending rounds, seems out of reach, despite mounting pressure to seal the deal quickly.

The idea is for the bloc to become leaner and do more with less in the wake of the UK’s departure, charting a new course that will better reflect changing global realities.

But priorities and ambitions vary considerably among member countries, and different proposals, with different financial ceilings, have been put forward by the Commission, Parliament, and Council President Charles Michel, who has been tasked with squaring this circle in the next few months.

Michel has proposed a budget of 1.074% of the EU’s gross national income, or €1.087 trillion. The Commission’s proposal sets the budget at €1.279 trillion (1.114% of EU-27 GNI). The European Parliament would like no less than 1.3% GNI.

Looking at the bigger picture, the difference of €192 billion is not huge, but the budget is largely a zero-sum game and allocating more funds to migration, digital, or green economy means less money for agriculture or regional policy, however you spin the numbers.

In this Policy Brief, our experts look at the key budget issues and their implications for the main policy sectors. Our video explainer of the MFF can be found here.

[Edited by Benjamin Fox]

By Beatriz Rios

The Multiannual Financial Framework (MFF) is the EU’s long term budget. It covers seven years and sets the spending limits for the Union over that period, and per area of expenditure. 

Although the bloc started using this system in 1988, the Lisbon Treaty turned the MFF from an interinstitutional agreement into a legally-binding act.  

The seven-year formula aims to make sure available resources match budgetary needs, ensure certainty and predictability for projects within the Common Agricultural Policy or the Cohesion Policy, guarantee budgetary discipline and make it easier to strike agreements on annual EU budgets.

The EU budget is primarily financed through national contributions from the 27 member states, as well as other sources of revenues such as import duties on products from outside the EU or fines imposed on companies that have violated EU competition law. 

EU member states decide on the size and the distribution of the budget per policy area by unanimity. However, they need the European Parliament to ultimately give their consent.

The legislation setting the legal framework for the EU funded programmes linked to the MFF is subject to co-decision between the Council and the European Parliament.

By Beatriz Rios

Member states are deeply divided over the size and the distribution of the EU’s next long-term budget. 

The so-called Friends of Cohesion, a group formed by Spain, Portugal, Greece, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia, want to protect the EU’s main traditional policies – Common Agricultural and Cohesion Funds – and have a more ambitious budget.

In the other corner, the ‘Frugal 4’ – the Netherlands, Austria, Denmark and Sweden – call for a “modernised” blueprint, with expenditure limited to 1% GNI and support new policy priorities – migration, security, innovation or climate change – even at the expenses of traditional ones. 

Although not part of the coalition of the prudent, Finland, Belgium, Ireland and Germany have expressed similar views in the past. 

France and Germany, the main contributors to the pot following the UK’s departure, have had a low profile on the debate over the past few months though. While none would like to see an important increase in national contributions, Paris’ priority is to protect the CAP.

Berlin, however, has kept a low profile lately because if there is to be no agreement before June, the German presidency of the Council will be tasked with closing the deal. For starters, German Finance Minister Olaf Scholz was very critical of Michel’s proposal, which he called “a step backwards”.

By Gerardo Fortuna

Although agriculture spending still represents the lion’s share of the EU’s long-term budget, the CAP’s proposed allocation of €329.2 billion is low compared to €383 billion in the current Multiannual financial framework (MFF).

Even the very concept of spending money on direct payments to farmers is under attack by some EU leaders who want further cuts in the EU’s main farming subsidy programme in order to fund other challenges for Europe like climate change and migration.

The CAP envelope is made up of three main sources: the direct payments to farmers and the market-related expenditures, which together form the so-called first pillar, plus the rural development support, which is considered as the CAP’s second pillar.

In the latest compromise proposal, the budget allocation for the first pillar is €256.7 billion in constant 2018 prices, with a €2.5 billion increase compared to the amount earmarked in both Commission’s CAP proposal presented in June 2018 and the Finnish presidency’s negotiating toolbox.

However, the fresh money devoted to CAP’s second pillar is proposed to be set at €72.5 billion, which is €7.5 billion less than the Finnish proposal, resulting in an overall €5 billion cut.

The decrease is only partly offset by ensuring more flexibility in the transfer between CAP’s two pillars.

The percentage for shifting up direct payments under the first pillar to rural development programmes in the second pillar is proposed to be increased to 20%, from 15% in both the Finnish presidency and the Commission draft proposals.

By Beatriz Rios

Cohesion Policy has been the EU’s most important investment tool for decades, accounting for almost a third of the budget. Introduced by then President Jacques Delors as the social pillar of the EU single market, Cohesion Policy aims to tackle national and regional inequalities by supporting the less developed areas of the Union. 

However, in the face of new priorities, Cohesion funds, too, are facing important cuts in the new MFF. The reduction of the EU’s regional assistance is estimated at between 8% to 12%. Furthermore, a proposed new Just Transition Fund would fall under the Cohesion umbrella and feed itself from regional funds. According to the Commission proposal, countries making use of the JTF are expected to channel at least 1.5 times the money from cohesion.

The implementation of the Paris Agreement on climate change is one of the priorities for the new Cohesion Policy. While regions with a GDP per capita under 75% of the EU average will still be considered as “less developed regions,” the criteria for regions in transition and more developed regions has also changed.

In the new Cohesion Policy, regions with an average GDP per capita between 75%-100% of the EU average, will fall under the scope of the transition regions. Before, the limit was set at 90%. Regions above the average will be considered “more developed.” The aim is to better distribute the money so that poorer regions have more access to funds, in spite of the cuts.

The co-financing rates are likely to vary too.  Aside from the financial situation, the youth unemployment rate, education levels, the effects of migration or the impact of climate change in the area would be considered for the allocation of funds from 2021. 

By Benjamin Fox

With member states likely to prioritise other policy areas, development spending is likely (once again) to be one of the victims of the EU’s external spending, which brings together a raft of budget lines including development.

Development policy faces a 6.45% cut to €7.02 billion under Charles Michel’s proposal, compared to the European Commission’s proposal. Meanwhile, funding for sub-Saharan Africa faces a 4.79% cut worth €1.36 billion.

One bone has been thrown to the development policy community, who have, unsurprisingly, welcomed Michel’s suggestion that an EU Financial Transactions Tax could be a new revenue stream in the next seven years.

NGOs are likely to urge ministers to reject the Michel cuts and push for increases instead. But the history of MFF negotiations suggests that no new cash is going to be put on the table and it will be a case of damage limitation.

By Samuel Stolton

Digital is one of the new priorities of the EU budget. 

Council President Charles Michel will attempt to convince leaders to back the EU’s digital and climate transitions by mobilising €500 billion in increasing commitments to the European Investment Bank by €100 billion, €10 billion of which would be “paid-in capital” according to leaked council draft conclusions.

The Council hopes this could free up €200 billion in lending capacities going towards such transition projects. More specifically, expenditure for costs under the single market, innovation and digital remit for 2021-2027 will not exceed €149,502 billion.

Within this outlay, cuts have been tabled to EU programmes, including Horizon Europe and Digital Europe. The former, representing the EU’s research and innovation framework, looks set to receive  €80.9 billion, after being cut from €86.6 billion in 2018 costings. 

Digital Europe, meanwhile, will be in for a €6.7 billion outlay, a cut from €8.2 billion. This particular programme focuses on investment in a series of key areas for Europe’s future technological development, including supercomputing, Artificial Intelligence, cybersecurity, digital skills, and the digitalisation of public administration. 

The proposed cuts have drawn strong reactions from industry. Cecilia Bonefeld-Dahl, director-general of the trade association DigitalEurope has said spending on the digital sector should increase substantially if Europe is to remain competitive in the field.

“This European Council will define Europe’s future,” Bonefeld-Dahl said. “Spending on digital can deliver economic growth, good well-paying jobs, and energy efficiency.”

By Fréderic Simon

A greener EU budget

Climate action will represent 25% of EU spending under the Commission’s seven-year budget proposal. This is up from 20% in the current EU budget for 2014-2020.

The EU’s climate effort will span policies on regional integration, energy, transport, research and innovation, agriculture as well as development aid, “making the EU budget a driver of sustainability,” the EU executive said in a statement when it unveiled its budget proposal, in 2018.

  • Parts of EU regional funding are already linked to the low-carbon economy. And even though regional funds will be slashed in the next EU budget, green spending will be strengthened with a Just Transition Fund worth €7.5bn, under Commission proposals tabled in January (read more).
  • The Common Agricultural Policy (CAP) will also see its green pillar reinforced, despite an overall reduction in farm spending foreseen in the EU budget (read more).
  • On science and research, the EU already agreed to set aside 35% of the bloc’s ‘Horizon Europe’ budget for climate-friendly technologies (read more). And two of the EU’s five research and innovation “missions” are directly related to climate action (read more). 

The Commission’s green budget proposal is backed by the so-called ‘Green Growth Group’ of 13 EU member states: Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Spain, Sweden, as well as the UK (see statement). Notably absent from the group are Central and Eastern EU countries like Poland, the Czech Republic and Hungary, most of which are heavily reliant on coal for electricity and heating.

But the European Parliament wants more. In a March 2018 resolution, it called for climate-related spending to reach 30% of EU budget “at the latest by 2027”. 

New resources

Other parts of the EU budget linked to the environment could prove controversial. This includes a proposal to allocate 20% of revenue from carbon trading – the Emissions Trading Scheme (ETS) – directly to the EU budget, as a way to decrease reliance on national contributions.

Another one is a proposed tax on plastic waste that would feed directly into the EU budget. National contributions there would be calculated on the amount of non-recycled plastic packaging waste in each member state (0.80 € per kilo), the Commission explained in a statement. The plastic tax proposal is currently considered “the most promising” way of bringing additional sources of revenue to the EU budget, EU sources said (read more).  

By Jorge Valero

The watered-down eurozone budget: For the first time, the EU’s long-term budget will finance a  new instrument to support euro area countries hit by sudden economic shocks and to incentivise national reforms. 

The new Budgetary Instrument for Convergence and Competitiveness (BICC), however, is far from the robust eurozone budget that France, Spain, Portugal and other eurozone countries wished for. It would barely be able to perform the stabilisation function expected in worsening economic times, therefore, the fiscal pillar the economic and monetary union requires will be still missing.

The MFF draft proposal put forward by Council President Charles Michel allocates €12,9 billion for BICC, the same figure included by Finland in it proposal.

The figure is far from the eurozone budget worth “several percentage points” of the area’s GDP that French President Emmanuel Macron proposed.  A euro-area budget of at least 2% of its GDP would be around €240 billion.

Given the expected limited firepower, France and other countries support the idea of topping up the MFF contribution with additional voluntary contributions through an intergovernmental agreement (IGA).

The Eurogroup adopted late on Monday (17 February) the parameters for the IGA, only in case further national contributions are considered.

The euro area finance ministers’ statement said there are “different views on the desired engagement in a possible IGA”. The need for an IGA will depend on whether EU leaders consider that additional money is needed for the BICC.

Eurogroup president Mario Centeno explained that ministers did not say how much additional money could be needed. But the Eurogroup statement suggested it should be a small amount, as external revenues “must not lead to a parallel system of own resources” and must be “additional in nature”.

The IGA would set the total amount and the contribution key for a period of time, which could be as long as the MFF, but also a shorter timeframe to provide more flexibility, the eurozone ministers said.

The contributions would be managed by the Commission. 

By Alexandra Brzozowski

The creation of a new branch in the European Commission – DG Defence Industry and Space (DEFIS) – that was long opposed by Britain, is an attempt by Commission President Ursula von der Leyen to stem a decline in EU influence.

The EU’s new priorities will include internal security, crisis response and nuclear decommissioning, as well as the area of defence, to the tune of €14.3 million.

The Juncker Commission had proposed a €13 billion European Defence Fund, aimed at providing the financial firepower for cross-border investments in state-of-the-art and fully interoperable technology and equipment in areas such as encrypted software and drone technology. Charles Michel’s proposal slashed the financing for the EDF to €7.014 billion.

EU officials have repeatedly expressed concerns that the reduction, which comes at a time when European defence initiatives have started showing progress, will put in question the EU’s ambition about its defence policy.

By Sam Morgan

Connecting Europe Facility

One of transport policy’s main streams of revenue, the Connecting Europe Facility, is used to fund everything from canals and railway expansion to cross-border pipelines and broadband cables.

Split into three parts, energy, digital and transport, it is rail, air, roads and waterways that get the most out of the nearly €30bn-strong budget. Under the previous period, CEF Transport projects had just over €24bn to play with. But under Charles Michel’s proposal, the envelope shrinks to €21.3bn.

Energy and digital both see their war-chests pared down too. The Council president’s tweaks do try to leverage transport to refill the EU’s coffers and make a dent in the bloc’s greenhouse gas emissions: the proposal confirms that the idea of a levy on aviation is in the works.

Taxing plane travel is gaining in popularity and the Commission might be asked over the next few years to spell out how it could be done, whether through a fuel levy or ticket taxes.

As explained above, the EU will look into siphoning off a portion of existing Emission Trading System (ETS) revenues but new profits from the sale of pollution permits might be funnelled directly into the bloc’s piggy-bank. Although not included in the Michel proposal, work is in progress to include the shipping sector in the ETS. Green MEP Jutta Paulus, charged by the Parliament with working on a related file, told EURACTIV that revenues from vessels will be difficult to split up evenly between the 27 countries so it would make sense to have them go directly into a Brussels-managed fund.

Michel in Space

The European Space Programme is set to take a hit under the Michel MFF as well. The Commission’s original idea to give extraterrestrial activities €16bn has been scaled back to €13bn.

If the new proposal gains traction it still means the sector would get more money than in the last financial period, where it had to make do with €11.3bn, but the EU executive’s plans to lean more into space would be curtailed to an extent.

The Commission has laid the groundwork for more focus on satellites, rockets and even manned-missions, spinning off space policy into its own directorate-general along with defence matters. Under all the proposals, the EU’s market-leading global positioning system Galileo would get the lion’s share of the cash, while Earth-observing counterpart Copernicus would get the smaller slice.

Europe’s space heads will be disappointed if their resources are watered down but the European Space Agency will be able to console itself with the fact that its member states granted it a beefed-up budget late last year, despite not asking for one.

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